What Is Refinancing? Reasons For and Against

What Is Refinancing?

Refinancing is simply the process of switching a mortgage from one home loan lender to another. Borrowers have different motivations for switching, and there needs to be a clear benefit. There is no need to switch just because it has been a while or because someone else suggested it, but keeping on top of a home loan with regular reviews is important.

Below are some of the main reasons to switch, as well as reasons why switching might not be suitable.

Reasons to Refinance:

• Obtain a lower interest rate – rates change all the time, and what was set up initially might no longer be as competitive.
• Change features to suit new requirements, such as flexible repayments, redraw facilities, and account splitting.
• Circumstances have changed – perhaps the initial loan was taken out with unusual employment circumstances or a low deposit.
• Release equity for renovations, future investments, or personal use.
• Switch to or from a fixed rate.
• Consolidate debts – rather than paying multiple lenders at various, likely higher rates, debts can be combined into one manageable repayment at home loan rates.

Reasons Not to Refinance:

• Plans to sell or off-load the property very soon.
• Switching costs outweigh the financial benefits of moving.
• Credit history has been severely damaged – though speaking with a mortgage broker can help clarify if equity might assist in easing some of that burden.
• Employment has ceased or income has been depleted.
• Insufficient equity is available.
• A very low loan balance remains – an accelerated payment plan may be worth considering instead.

When considering whether to switch a home loan, borrowers should always assess their goals and whether refinancing helps achieve them faster. Weighing up whether the benefits outweigh the negatives and consulting a professional can help clarify the right option.

Refinancing is not always the only solution, as other strategies may also be available to help achieve financial goals.